Cyclical stocks drop after Fed warns over QE

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LONDON REPORT

BRITAIN’S blue chip shares posted their biggest one-day loss since July yesterday on concerns the Federal Reserve could end its stimulus programme sooner than expected, removing a driver of the recent equity rally on both sides of the pond.

The FTSE 100 closed down 103.83 points, or 1.6 per cent, at 6,291.54, dropping below the 6,300 level for the first time in 10 days. Stocks that benefit the most in rising markets, or “cyclicals”, fell furthest.

The index’s decline was the biggest since last July, at the height of the Eurozone crisis and just a few days before European Central Bank chief Mario Draghi promised to do “whatever it takes” to save the euro, prompting a global rally in equities.

Commodity stocks and banks combined to take over 50 points off the FTSE 100 index, and volatility jumped 13 per cent. Investors became cautious after minutes of the Federal Reserve’s January policy meeting showed a number of policymakers think the US central bank might have to slow or stop its asset purchase programme before seeing the pickup in hiring the programme is designed to deliver.

“The biggest impact [on today’s falls] has been the Fed minutes, and supposedly a more hawkish tone by the Fed,” James Butterfill, global equity strategist at Coutts, said. Still, he expected the Fed to continue with asset purchases, or quantitative easing, in the near term. “It’s also off the back of how much markets have run up year to date. We’ve already surpassed our base-case fair value on the FTSE within the first month and a half, so it’s not surprising we’d see a pullback.”

The market had closed at a five-year high on Wednesday, marking an 8.4 per cent gain so far this year, against a 5.8 per cent rise for the whole of last year.

Also weighing on sentiment yesterday were worse-than-expected Eurozone purchasing managers surveys, which dealt a blow to hopes the currency bloc might emerge from recession soon.

Mining stocks were the biggest drag on the FTSE 100 as concerns about an end to US monetary stimulus hit a sector already hampered by weaker metals prices and market talk of a hedge fund liquidating big positions in commodities.

BHP Billiton was among the worst off, tumbling four per cent. It extended falls from the previous session when it reported its worst profit drop in more than a decade, with Citi downgrading its rating on the stock to “neutral”.